ESMA Guides Investment Firms on Expectations to Avoid Greenwashing in ESG Strategies

The European securities regulator has issued fresh guidance aimed at tightening how investment firms communicate ESG strategies, as scrutiny intensifies around greenwashing risks in sustainable finance marketing across the EU.

The European Securities and Markets Authority has published a new thematic note setting out its expectations for how market participants should present ESG integration and ESG exclusion strategies. The guidance focuses on preventing misleading claims in communications with investors, particularly where ESG features are referenced in fund marketing.

 

Regulatory Context and Purpose

 

The new note forms part of a broader series launched by ESMA to address sustainability-related claims made by issuers and asset managers. An earlier publication in mid-2025 focused on the use of ESG credentials such as labels, ratings, and certifications. This latest guidance shifts attention to how ESG strategies themselves are described, especially in products marketed to retail investors.

At the core of ESMA’s approach are four principles that all sustainability claims should meet. Claims must be accurate, accessible, substantiated, and kept up to date. According to the regulator, failure to meet these standards increases the risk that investors misunderstand the real sustainability profile of a product.

 

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ESG Integration Strategies Under the Spotlight

 

ESMA observed wide variation in how ESG integration is applied across funds. In some cases, ESG factors are binding and applied across entire portfolios. In others, they are optional, limited to specific holdings, or secondary to traditional financial considerations.

The regulator noted that ESG factors may play a decisive role in portfolio construction for certain products, while in others they have only marginal influence. Similarly, some strategies require portfolio action when ESG metrics change materially, whereas others do not. These differences are often not clearly explained in marketing materials, creating a gap between investor expectations and actual investment practice.

ESMA highlighted that products described as applying ESG integration may, in some cases, show little or no meaningful difference in portfolio composition compared with non-ESG strategies.

 

Inconsistencies in ESG Exclusion Approaches

 

The analysis also identified inconsistencies in ESG exclusion strategies. Funds apply exclusions using varying thresholds, and not all rely on a clear assessment of materiality when defining exclusion criteria. Some strategies exclude activities or issuers based on firmwide policies, while others use product-specific rules, yet these distinctions are not always transparent to investors.

As with ESG integration, ESMA found that exclusion strategies may or may not materially affect portfolio holdings, despite being prominently referenced in fund disclosures.

 

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Risks of Misleading Communication

 

According to ESMA, the lack of clarity around how ESG integration and exclusions are implemented creates a risk that sustainability claims are misinterpreted. The regulator warned that investors may be misled when funds use ESG terminology without explaining its practical impact on investment decisions and portfolio outcomes.

To address this, ESMA stressed the need for plain language explanations that clearly describe how ESG factors influence security selection, weighting, and overall portfolio construction.

 

Expectations for Market Participants

 

The guidance outlines examples of good and poor practices, encouraging firms to be explicit about whether ESG integration is binding or discretionary, how materiality is assessed, and where ESG considerations sit relative to other financial drivers. For exclusion strategies, firms are expected to clarify thresholds, scope, and the effect of exclusions on the investable universe.

Overall, the thematic note signals ESMA’s intention to raise the bar on transparency in ESG investing. While ESG integration and exclusion strategies remain valid approaches, the regulator is making clear that how they are communicated must reflect their actual ambition and impact, or risk being considered misleading in an increasingly regulated sustainable finance landscape.

 

Click here: ESMA’s thematic note.